Mining unrest gave economy hard battering

THE violent and prolonged strikes which almost paralysed South Africa’s mining sector between August and October were by far the biggest — and most challenging — events for the economy this past year.

The unrest took a toll on economic growth, exports, the rand’s exchange rate, and business and consumer confidence.

Perhaps most significantly, it tarnished investor perceptions of South Africa and triggered the first credit rating downgrades for the country since the advent of democracy in 1998.

"The mining strikes came from nowhere and smacked us on the head," says Absa Capital economist Jeff Gable. "It reminded everyone of South Africa’s deeper structural challenges, made people a bit more fearful and pushed SA’s image in the eyes of global investors a few steps backward."

The wildcat strikes kicked off with a stoppage at Lonmin’s Marikana platinum mine in August during which 44 people died. Unrest at other platinum and gold mines followed, costing the economy more than R10bn in lost output by the end of October, according to estimates from the Treasury.

The strikes were responsible for a sharp contraction in mining production during the third quarter of this year, which curbed overall growth in the economy to 1.2% from 3.4% in the second quarter — its slowest pace since the recession in 2009.

The unrest further led to the losses of about 15,000 jobs in the mining sector during the third quarter and knocked the rand to a three-and-a-half-year low at about R9 to the dollar in both October and November.

But the most unsettling effect of the industrial action was that it highlighted the country’s deeply entrenched socioeconomic challenges — poverty, inequality and high unemployment.

Moody’s Investors Service downgraded South Africa’s credit rating by one notch to Baa1 in September, citing a decline in the government’s institutional strength amidst "increased socioeconomic stresses" and "diminished capacity" to manage risks to growth and competitiveness.

Standard & Poor’s (S&P) followed suit in October, downgrading its rating for SA to BBB from BBB+ — a notch lower than Moody’s. S&P warned that the strikes would feed into the political debate ahead of elections in 2014, creating uncertainty over future economic policy.

"The downgrades were all about political issues," says NKC economist Christie Viljoen. "The second half of the year was dominated by local events; we shot ourselves in the foot with headline-making bad news stories."

By comparison, the first half of the year was much tamer, dominated by a deepening global slowdown and its effect on demand for local exports.

Worries over the fallout from Europe’s sovereign debt crisis and the looming US "fiscal cliff" prompted the Reserve Bank to unexpectedly cut its key repo rate half a percentage point to 5% in July. The fiscal cliff refers to automatic tax increases and spending cuts due to take effect next month, which could tip the US economy into recession.

Previously, interest rates had been steady in SA since November 2010, after a series of rate cuts which lowered the repo rate from 12% in December 2008.

Despite that step, consumer spending, the economy’s main engine, slowed steadily over the year in the face of rising inflation and slower growth in disposable income. Growth in household expenditure moderated to 2.6% in the third quarter of the year from 4.4% at the end of last year — again, its slowest pace since the recession three years ago.

Deteriorating fundamentals and the crisis in the mining sector forced the government and economists to revise their growth forecasts for this year steadily downwards. In January, market consensus estimates had predicted the economy would expand 2.8% this year. Now, the forecasts have declined to 2.3%.

There was bad news from other quarters as well — the unemployment rate rose to 25.5% during the third quarter from 24.9% in the second.

Another worrying development was the widening of South Africa’s trade deficit, which reflects both the effects of the global slowdown and of mining strikes on domestic exports, which generate most of the country’s foreign exchange earnings. The cumulative shortfall ballooned to R104.6bn in the first 10 months of this year, from just R9.4bn over the same period last year.

This is ominous for the deficit on the current account, SA’s broadest measure of trade in goods and services. The shortfall is financed mainly by foreign purchases of domestic bonds and shares, known as "hot money". This could easily reverse if global risk aversion rises.

Despite the slowdown in consumer spending, this year was marked by an explosion in unsecured lending, particularly to low-income earners who are struggling to repay their debt. Unsecured credit is less than 10% of total lending so it is not seen as a threat to the financial system. But it has grown by an annual rate of well over 30% in both October and September, extending the buoyant trend seen this year.

The National Credit Regulator says that nearly half of South Africa’s credit-active consumers have impaired records.

Mineworkers take part in a march at Lonmin's Marikana mine on September 10. Picture: REUTERS

THE violent and prolonged strikes which almost paralysed South Africa’s mining sector between August and October were by far the biggest — and most challenging — events for the economy this past year.

The unrest took a toll on economic growth, exports, the rand’s exchange rate, and business and consumer confidence.

Perhaps most significantly, it tarnished investor perceptions of South Africa and triggered the first credit rating downgrades for the country since the advent of democracy in 1998.

"The mining strikes came from nowhere and smacked us on the head," says Absa Capital economist Jeff Gable. "It reminded everyone of South Africa’s deeper structural challenges, made people a bit more fearful and pushed SA’s image in the eyes of global investors a few steps backward."

The wildcat strikes kicked off with a stoppage at Lonmin’s Marikana platinum mine in August during which 44 people died. Unrest at other platinum and gold mines followed, costing the economy more than R10bn in lost output by the end of October, according to estimates from the Treasury.

The strikes were responsible for a sharp contraction in mining production during the third quarter of this year, which curbed overall growth in the economy to 1.2% from 3.4% in the second quarter — its slowest pace since the recession in 2009.

The unrest further led to the losses of about 15,000 jobs in the mining sector during the third quarter and knocked the rand to a three-and-a-half-year low at about R9 to the dollar in both October and November.

But the most unsettling effect of the industrial action was that it highlighted the country’s deeply entrenched socioeconomic challenges — poverty, inequality and high unemployment.

Moody’s Investors Service downgraded South Africa’s credit rating by one notch to Baa1 in September, citing a decline in the government’s institutional strength amidst "increased socioeconomic stresses" and "diminished capacity" to manage risks to growth and competitiveness.

Standard & Poor’s (S&P) followed suit in October, downgrading its rating for SA to BBB from BBB+ — a notch lower than Moody’s. S&P warned that the strikes would feed into the political debate ahead of elections in 2014, creating uncertainty over future economic policy.

"The downgrades were all about political issues," says NKC economist Christie Viljoen. "The second half of the year was dominated by local events; we shot ourselves in the foot with headline-making bad news stories."

By comparison, the first half of the year was much tamer, dominated by a deepening global slowdown and its effect on demand for local exports.

Worries over the fallout from Europe’s sovereign debt crisis and the looming US "fiscal cliff" prompted the Reserve Bank to unexpectedly cut its key repo rate half a percentage point to 5% in July. The fiscal cliff refers to automatic tax increases and spending cuts due to take effect next month, which could tip the US economy into recession.

Previously, interest rates had been steady in SA since November 2010, after a series of rate cuts which lowered the repo rate from 12% in December 2008.

Despite that step, consumer spending, the economy’s main engine, slowed steadily over the year in the face of rising inflation and slower growth in disposable income. Growth in household expenditure moderated to 2.6% in the third quarter of the year from 4.4% at the end of last year — again, its slowest pace since the recession three years ago.

Deteriorating fundamentals and the crisis in the mining sector forced the government and economists to revise their growth forecasts for this year steadily downwards. In January, market consensus estimates had predicted the economy would expand 2.8% this year. Now, the forecasts have declined to 2.3%.

There was bad news from other quarters as well — the unemployment rate rose to 25.5% during the third quarter from 24.9% in the second.

Another worrying development was the widening of South Africa’s trade deficit, which reflects both the effects of the global slowdown and of mining strikes on domestic exports, which generate most of the country’s foreign exchange earnings. The cumulative shortfall ballooned to R104.6bn in the first 10 months of this year, from just R9.4bn over the same period last year.

This is ominous for the deficit on the current account, SA’s broadest measure of trade in goods and services. The shortfall is financed mainly by foreign purchases of domestic bonds and shares, known as "hot money". This could easily reverse if global risk aversion rises.

Despite the slowdown in consumer spending, this year was marked by an explosion in unsecured lending, particularly to low-income earners who are struggling to repay their debt. Unsecured credit is less than 10% of total lending so it is not seen as a threat to the financial system. But it has grown by an annual rate of well over 30% in both October and September, extending the buoyant trend seen this year.

The National Credit Regulator says that nearly half of South Africa’s credit-active consumers have impaired records.

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